The oil industry has called for abolishing the super tax and other levies, urging the government to address sales tax exemptions in Budget 2026 to help the sector operate smoothly.
In its proposals to the Federal Board of Revenue (FBR), the Oil Companies Advisory Council (OCAC) pointed out that the Finance Act 2024 introduced a sales tax exemption on petrol, high-speed diesel (HSD), kerosene, and light diesel oil (LDO). These were previously zero-rated, allowing input tax claims. With the exemption, input tax has started accumulating.
Since these product prices are government-regulated, the input tax disallowance has increased operating and infrastructure costs. The estimated impact for Tax Year 2025 exceeds Rs33 billion. OCAC proposed bringing petroleum products back under the taxable regime to ease the burden.
Abolishment of super tax
OCAC argued that global and local economic pressures have already strained formal businesses. The super tax, originally a one-time measure, has continued and now threatens the viability of documented companies. OCAC urged its removal for Tax Year 2025-26.
Minimum tax and sales tax on advances
The OCAC also objected to the minimum tax under Section 113 of the Income Tax Ordinance, citing that prices and margins for petroleum products are fixed by the government. These margins encompass establishment, development, and operating costs, yet the current minimum tax consumes roughly 16% of the Oil Marketing Companies' (OMCs) fixed margins. It recommended reducing the minimum tax applicable to refineries and OMCs to 0.25%.
It also sought the withdrawal of sales tax on advance receipts, reintroduced via the Finance Act 2024. Due to high transaction volumes, this requirement burdens OMCs without adding significant revenue for the government.
Commissioner's power and
export taxation
OCAC recommended restoring the commissioner's power to issue exemption certificates, which was withdrawn under the Finance Act 2024. This change has hit refineries hard due to their large sales and low margins.
The Council also asked for reinstatement of the final tax regime on exports. Currently, the 1% tax on exporters is treated as a minimum tax, also exposing them to super tax. This affects refineries exporting products like furnace fuel oil and naphtha amid weak local demand.
Royalty payments and subsidy income
The Finance Act 2024 also introduced a 25% disallowance on sales promotion and advertising expenses where royalty arrangements exist with associated entities. OCAC argued that this discourages foreign investment and adversely affects multinationals operating in Pakistan, recommending that the disallowance be withdrawn.
OCAC further urged reinstatement of the tax exemption on subsidy income received from the federal government. Previously exempt, the withdrawal of this exemption has had a negative impact on companies executing government directives.
Tax burden on salaried individuals
OCAC highlighted concerns regarding the revised tax slab rates for salaried individuals introduced by the Finance Act 2024. With a 10% surcharge on high earners and the lowering of slab thresholds, many mid-level earners are now heavily taxed. This change is affecting disposable incomes, corporate wage structures, and talent retention. The Council recommended reverting to the pre-2024 salary tax structure and removing the 10% surcharge.
OMC margins and cost recovery
In addition to tax proposals, OCAC called for the revision of OMC margins, citing losses resulting from the sales tax exemptions. In a letter, it noted unresolved issues including unadjusted sales tax worth Rs73.48 billion from April 2022 to June 2024 and the ongoing sales tax exemption, which is expected to raise costs by Rs33 billion in FY 2024-25.
The industry also faces smuggling, high turnover tax, and inadequate margins. OCAC stressed aligning margins with actual costs, as discussed with OGRA and the Petroleum Division.
The margin revision proposal, based on Pakistan State Oil's cost structure, approved by the Economic Coordination Committee in September 2023, incorporates financing costs tied to maintaining a 20-day stock cover, handling losses, operating expenses and CPI inflation. OCAC also recommended annual margin revisions through a jointly developed formula.
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